A Perilous Descent

In CropLife magazine’s January 2008 outlook issue, we compared the fertilizer marketplace to a mountain, pointing out that the industry was poised for a gradual descent after reaching the summit fueled by increased corn plantings during 2007. By coincidence, a speaker at one of the fall trade shows made a similar comparison regarding fertilizer’s fortunes moving forward.

“As you may know, many people climb Mount Everest each year,” said Joe Prokopanko, president and CEO for The Mosaic Co., speaking at the 2008 Agricultural Retailers Association meeting. “While some are hurt on the way up the mountain, many more are injured while coming back down.”

Today, ag retailers can largely appreciate this imagery. Following a spectacular sales performance in 2007 and an equally impressive one through the first nine months of 2008, fertilizer demand and prices have come tumbling down the mountain. This has retailers — many of whom stocked up fertilizer early on to make certain to meet expected demand — reaching for stomach medicine while hoping for some kind of recovery before the spring fertility season rolls around.

“What keeps me up at night these days?” asked Hov Tinsman III, president at Twin State Inc., Davenport, IA, in an e-mail to CropLife. “How and when my current fertilizer inventory is going to fall in value. Hopefully, not until after I apply it.”

To appreciate just how quickly some fertilizer prices have dropped, consider sulfur. According to Prokopanko, sulfur was selling for $800 per ton during the summer months of 2008. By early December, it had plummeted to $65 per ton, a whopping 92% drop. Even worse, he added, several market observers were expecting the price would be as low as $50 per ton by end of 2008.

“The net result of all this market instability is that no one is buying and distributors are holding all of their inventories,” said Prokopanko.

Reviewing The Macronutrients

Nitrogen-based fertilizers have gone through similar price declines. For instance, urea was selling for $760 per ton in August 2008; today it can be had for approximately $250 per ton. Likewise, anhydrous ammonia dropped from a high of more than $1,000 per ton during the summer to $530 per ton by the end of the year. As a consequence of these price declines, Doug Stone, senior vice president of sales and marketing for Terra Industries, Inc., was predicting that nitrogen-based fertilizer consumption would drop in 2009, from 21.7 million tons in 2007/08 to 20.8 million tons. For the record, he added that agriculture tends to consume an average of 12.1 million tons of this total. Furthermore, global nitrogen-based fertilizer producers are cutting back on production, temporarily closing plants or running a reduced number of production lines as a result.

“This will likely mean projected tight demand/supply balances for spring 2009, which could cause prices to rebound some,” said Stone, speaking at the Fertilizer Outlook and Technology Conference in early November. “However, the price ride is still ongoing with more loop-de-loops ahead.”

For phosphate, the path down the mountain has been treacherous as well. According to industry insiders, di-ammonium phosphate (DAP) prices were at $1,200 per ton during the summer months. Today, they are down more than 50% to $550 per ton. This has effectively caused phosphate production to grind to a halt. For example, in November, PotashCorp announced production cuts at its White Springs, FL, site. Likewise, Mosaic reported that its phosphate sales volume for its fiscal second quarter was down 38% from first quarter levels, to 1.3 million metric tons.

The potash situation is the same. According to Jeff Holzman, manager of market research for PotashCorp, producers are cutting back on their output levels in an attempt to draw down supplies and stabilize prices. “There are source deferrals of packages in the fourth quarter of 2008 and into the first quarter of 2009,” said Holzman. “Shipments will be down around 3% for the year. Also, in 2009, we can expect no growth or some modest growth to occur in the market.”

The Chicken Little Syndrome

Given all these facts, Mosaic’s Prokopanko asked if 2009 would be the year that the fertilizer industry finally suffers from the long predicted “Chicken Little” effect, with suppliers unable (or unwilling) to meet grower-customer crop nutrient demands, which will reduce crop yields significantly. “Will this be the year when the sky really falls?” he asked.

Ultimately, however, he doesn’t think things will get this bad. Based upon global population projections and the crops needed to feed this growing populace, Prokopanko expects crop nutrient demand to grow from 170 million tons today to 230 million tons by 2020. “The long-term outlook for global agriculture looks rock solid to us,” he concluded. “Although the current market volatility provides serious questions in the near term, we still have as many blessings in this industry as we have challenges.”

Other fertilizer industry watchers agree with this assessment. According to Andy Jung, research manager, phosphate for CRU International, world grain stocks are at historic lows. “Right now, the global grain carryover is 11 weeks,” said Jung. “In 2002, this total stood at 13 weeks. That means we are only one big disaster away from wiping out this amount completely.”

In light of this, Rich Pottorff, chief economist at Doane Advisory Services, said the world will need more corn acreage in 2009 to keep pace with global demand, particularly from U.S. growers. For this reason, he is projecting that growers will plant 89 million acres of corn in 2009, up slightly from 86 million acres in 2008. “We really need more corn acres than this, but the economics have to be there for that to happen, which they are not right now,” said Pottorff. “We have to add 26 million metric tons of food annually to feed the 80 million more people being born each year.”

Consequently, this increased corn acreage should help boost fertilizer demand during 2009. Demand for ethanol should help. Ethanol production in 2009 could require up to 4.8 million bushels of corn, despite waning support. “Even if biofuels support collapsed completely, nitrogen-based fertilizer demand would only decrease by 2%,” said Terra’s Stone.